Differences in carbon risk spillovers with green versus traditional assets: Evidence from a full distributional analysis

This paper studies the dynamic risk spillover of carbon and financial markets through a quantile-based framework. Potential asymmetry of the cross-market spillover is examined from the perspectives of the data distribution, differences in financial asset types, and pre and post periods of the COVID-19 pandemic onset. Using an international daily dataset covering the recent decade, our empirical analysis offers supportive evidence of established theoretical expectations. The empirical results demonstrate a unidirectional risk spillover from the carbon market to both traditional and green asset markets. The spillover is weakly positive under various market conditions, indicating a consistent diversification gain of carbon commodities against financial assets. Carbon's sheltering role is further enhanced as a hedge for green assets, in particular conditions when the risk levels of carbon and green markets are high and low, respectively. In addition, the onset of the pandemic is found to strengthen cross-market risk spillovers.